Wrestling a monster: National Tax Convention aims at correcting maligned system, instituting fiscal reform.

In February, federal officials, governors and mayors sat down to begin a series of talks on fiscal reform, dubbed the National Tax Convention.

The government tried to imbue the event with a historic tone: the inauguration was set on the same day, in the same town, Queretaro, where Venustiano Carranza proclaimed the new Constitution in 1917. President Fox asked participants how they wanted to be remembered in the history books and called for an end to the partisan politics that have paralyzed the fiscal reform agenda in Mexico for years.

While delegates at the opening ceremony attempted to muster the spirit of the occasion--promising to hammer out an improved model of Mexico's maligned tax system--analysts say there is little hope of building the consensus for substantial reform.

Convened at the call of governors, the project has brought Cabinet officials, governors and mayors together to work for the next five months to "federalize" taxation and spending by redistributing tax powers and responsibilities more equitably. Delegates will meet through the summer in eight working groups on different issues, including spending, public debt and transparency.

FOX'S LAST STAND

During the negotiations for income reform, Fox's administration may make another attempt to get backing for its sales tax plan. Congress has refused to pass Fox's initiative to create a single sales tax--by including currently exempt items like food and medicine under the nation's value-added tax (VAT).

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The measure was only narrowly defeated late last year in a split Congress. Negotiations led to a meltdown in the former ruling Institutional Revolutionary Party (PRI) between vote-courting populists and the reform-minded wing willing to back Fox's plan.

During the tax convention, governors and mayors, who face budget limitations, may be more sympathetic to Fox's call for boosting revenue than the bickering Congress, analysts say. But familiarity with the pressure of budget constraints won't guarantee results.

"There is no agreement on how to increase revenue," said Isaac Katz, an economist at the Autonomous Technological Institute of Mexico (ITAM).

Katz described the convention as the last hope of the Fox administration to reach a broad consensus on VAT reform. Such a validation by governors could put a renewed pressure on Congress. But the widespread belief is that any focus on the controversial VAT would drive the convention into the ground.

A QUESTION OF FEDERALISM

Instead, most of the discussion will revolve around states' demands for more funds and the federal government's call for increased local fiscal responsibility. Federal authorities currently collect the lion's share of taxes, then dole out checks to states and municipalities. Nearly 90 centavos of every peso spent by state governments comes from federal transfers. The federalists of this convention would like to see states increase their tax base. But many see little incentive to do that.

"States want the federal government to assume all the costs of taxing, but they just want to spend," said Jose Castelazo, executive secretary of the National Institute of Public Administration (INAP).

Beyond this roadblock waits an obstacle course of other problems. While the federal government has opened its books to increasing scrutiny, state and local governments remain shrouded in secrecy and havens for corruption, according to Juan Pardinas, a researcher at the CIDAC think tank. They don't deserve another peso until there is real accountability, Pardinas said, nor should they have greater taxing powers.

The federal government also hopes to win local backing for pension reform to ease pressure on public debt. Pension obligations for employees of the bureaucracy, hospitals, schools and state-run power companies are mounting into the shape of a looming fiscal crisis, Eduardo Sojo, Fox's chief policy advisor, told the conference.

Payments on the pensions and other debt, including the 1994-95 bank bailout, add the equivalent of around 3% of GDP on top of the running deficit of over 0.6%, according to analysts. Until that debt can be lowered, the government will continue to dominate credit markets.

POLITICAL RAMIFICATIONS 

Still, there is some hope for limited success from the convention. The Fox government may be able to take advantage of a divided PRI to push its agenda.

While some old-guard PRI governors prefer the status quo, a group of mostly northern governors back a real federalist overhaul. Among the reformers is Hidalgo Gov. Manuel Angel Nunez Soto, who is considered a strong candidate for his party's presidential nomination for 2006.

Nunez wants to rewrite the Constitution, increase the transparency of local books and register businesses where they operate. Currently, nearly all are registered in the nation's major metropolitan hubs--Mexico City, Monterrey and Guadalajara--regard-less of where they earn their profits. A symptom of the nation's centralized tax system, companies have placed their headquarters to be near tax offices and other companies.

If Nunez and his camp hold sway, solid proposals could be drafted. However, political jockeying in the 10 gubernatorial races set to run this year will further complicate the chances of reaching agreements. Beyond the convention, whatever accords are signed at the end of July still have to pass through the fractious halls of Congress.

"Don't expect miracles, not now, not in three months, not in six. This is a process," PRI Dep. Francisco Davila told reporters. "We will take several years to bear any fruit."

Michael O'Boyle is a reporter for the Mexico edition of the Miami Herald.